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The degree of substitutability between clean and dirty energy plays a central role in leading economic analyses of optimal environmental policy. Despite the importance, assuming a constant and exogenous elasticity of substitution has been a dominant theoretical approach. We challenge this assumption by developing a dynamic general equilibrium model with an endogenous elasticity of substitution that interacts with the relative share of clean inputs in the economy. We find strong dynamic feedback effects arising from endogenous substitution capacity that amplifies the impact of directed technical change and accelerates the transition to a green economy. [ABSTRACT FROM AUTHOR]

We study the influence of industrial lobbying on national climate policies and the formation of an international environmental agreement if the coalition countries use border carbon adjustments to protect domestic producers. We find that the effects of this political influence crucially depend on the distribution of carbon tax revenues. If these are transferred to the households, lobbying distorts carbon taxes downwards to reduce the tax burden and does not affect coalition sizes. This leads to higher emissions and lower welfare. By contrast, if tax revenues are given back to the firms, lobbies in the outsider countries favor carbon taxes, whereas lobbies in the coalition countries favor carbon subsidies to raise the international commodity price. This reduces the tax difference and the welfare difference between the countries, which reduces the free-rider incentives. Then, lobbying stabilizes the grand coalition and reduces global emissions compared to a "perfect" world without lobbying if the political influence is sufficiently strong. [ABSTRACT FROM AUTHOR]

The ongoing debate concerning the ranking of taxes versus cap and trade for climate policy begins with Weitzman's (1974) seminal slope-based criterion and concludes that taxes likely dominate quotas. We challenge this conclusion and the intuition behind it. Because technology shocks and pollution stocks are both persistent, a technology shock alters the intercepts of both the marginal damage and abatement cost curves. The ratio of these two intercept shifts is as important as the ratio of slopes in ranking policies. Technology innovations diffuse gradually, strengthening the importance of the ratio of intercept shifts. For plausible parameter combinations, quotas can dominate taxes. [ABSTRACT FROM AUTHOR]

This article evaluates if and to which extent policy can steer innovation towards eco-friendly technologies. We construct a cross-country dataset on sectoral green innovation and complement it with data on policies designed to address environmental market failures: environmental taxes, regulation, and R&D subsidies. While all of these tools exert a positive effect on green innovation, our IV estimates reveal substantial heterogeneities across policies. Overall, green innovation reacts most strongly to R&D subsidies for renewables, but interaction effects between different policies need to be considered. [ABSTRACT FROM AUTHOR]

Population growth has two potentially counteracting effects on pollution emissions: (i) more people imply more production and thereby more emissions, and (ii) more people imply a larger research capacity which might reduce the emission intensity of production, depending on the direction of research. This study investigates how to achieve a given climate goal in the presence of these two effects. A growth model featuring both directed technical change and population growth is developed. The model allows for simultaneous research in polluting and non-polluting technologies. Both analytical and numerical results indicate that population growth is a burden on the environment, even when all research efforts are directed toward non-polluting technologies. Thus, research subsidies alone cannot ensure environmental sustainability. Instead, the analysis highlights the importance of carbon taxes for climate change mitigation. [ABSTRACT FROM AUTHOR]

Promoting investment in low carbon "clean" sectors has gained popularity over the last years under the heading of sustainable finance, at the same time raising concerns about adverse welfare effects of such policies. We analyze the political economy of subsidizing investment in "clean" industries in a stylized two-sector small open economy model with irreversible investment and reelection risks. We show that sustainable finance has a welfare cost if more targeted climate policy instruments are available. However, sustainable finance may be used by incumbent governments as an instrument to influence environmental policy decisions of future governments, which may have different preferences. Our model also offers an explanation for the political polarization about sustainable finance and climate policy currently observed in the United States. • We analyze impacts of tax-favoring capital invested in "clean" sectors. • Our approach considers a two-sector small open economy model. • Commitment to future environmental policies is preferred to sustainable finance. • Sustainable finance can induce stricter policies of future governments. • Our model sheds light on the polarization in the debate about such policies. [ABSTRACT FROM AUTHOR]

Cap and trade schemes often use a policy of adjustable allowance supply with the intention to stabilize the market for allowances. We investigate whether these policies deliver with a focus on allowance prices. Motivated by existing policies, we study schemes that rely on either the allowance price (price measures) or the surplus of unused allowances (quantity measures) to adjust supply in a dynamic cap and trade market. Compared to emissions trading under a fixed cap, we find that price measures stabilize allowance prices. Quantity measures can be destabilizing. Though phrased in the context of changing interest rates, our results warn more generally against the belief that quantity measures are a suitable instrument to promote a stable cap and trade market. [ABSTRACT FROM AUTHOR]

Consider a Hotelling model with exploration investments, a backstop technology and two groups of countries, a climate coalition and a free-riding fringe. If the coalition is price taker in the fossil fuel market, a higher marginal climate damage leads to a reduction of the coalition's cumulative fuel consumption, which reduces the fuel price and, thus, induces carbon leakage. If the coalition is sufficiently small or its energy demand is sufficiently price sensitive, both the initial extraction and the cumulative discounted climate damages decrease (no weak/strong green paradox). This also applies if exploration investments are sufficiently productive, so that a lower fuel price leads to a considerably lower total extraction. If the coalition acts strategically in the fossil fuel market, it accounts for terms-of-trade and carbon-leakage effects. Then, a higher marginal climate damage can lead to an increase of the coalition's cumulative fuel consumption, which prevents a weak green paradox, while a strong green paradox never occurs. In an empirically calibrated economy, we show that a strong green paradox can occur without a weak green paradox and vice versa with a price-taking coalition. With a strategically acting coalition, a weak green paradox can be part of a unilaterally optimal policy reaction. [ABSTRACT FROM AUTHOR]